You need a macro view of the world to answer one question, how’s the water? In his famous commencement speech, David Foster Wallace began with a fable. “There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”
For the first time in decades, our water is changing. Where our economy is concerned, the Fed sets the temperature of water, and it getting colder. Since 2022, the Fed raised rates from 0.08% to 5.4%, officially ending the era of free money.
Higher rates are waking a sleeping giant. 0% rates meant governments could freely borrow. What’s that expression…easy money makes stupid people? Governments around the world took on massive levels of debt typically seen only in war. Our finances look like we’re limping back from Armageddon, not coming out of the most peaceful era in recent history just now walking into not one, not two, but potentially three wars!
The monetary policy that’s getting less attention is the selling off of the Fed’s balance sheet. About one trillion has been removed from our economy since 2022 as the Fed began selling its assets and stashing the cash. This is the largest reduction in our money supply in over 30 years. For some economists, myself included, this guarantees a recession. For details, look up the Quantity Theory of Money.
The probability of a recession misses the larger threat of a currency debasement when our government realizes the only way to pay 35 trillion is to \(print\) 35 trillion.
We cannot default on our debt. That leaves three options:
Grow our way out of it
Keep kicking the can
Print more money
…starting the see the appeal of non-corruptible money outside governments control?
Monetary regimes will continue to evolve likely beyond the dollar system. Water changes. What we should focus on is living with each other through the changing tides. With so much attention on a new monetary order, we’ve gotten away from trying to build a political economy for the world to envy. While crypto offer trustless transactions, they cannot replace the fundamental values of fairness, justice, and opportunity—principles that cannot be digitally programmed.